People Still Aren't Ready To Forget About The Pain Of Past Oil Price Shocks

Editor's note: Below is an interview with Kevin Book, research head at ClearView Energy Partners LLC. This Q&A went out to subscribers of our "10 Things You Need To Know Before The Opening Bell" newsletter on Friday morning. Sign up here to get the newsletter and more of these interviews in your inbox every day.

BI: What is the most underreported energy story at the moment?

Our perennial answer remains “efficiency.” Energy prices shocked end-use sectors twice in the space of a decade. Even without government intervention, the behavioral imprint of scarcity pricing may take years – or decades – to fade from consumption patterns. Nor have government incentives for conservation diminished. Efficiency standards are ramping up here at home. Overseas, governments are paring back subsidies. In short, past trends may not predict future demand very well.

BI: What should be investors' biggest concerns coming out of Ukraine?

Uniform Western sanctions against the Russian energy sector could create unpredictable results for U.S. companies invested in producing Russian resources. Asymmetrical, U.S.-only sanctions against the Russian energy sector could shift revenues from U.S. companies to their European counterparts.

BI: What is your biggest concern heading into spring season?

KB: We see downside risk to crude in the months ahead, notwithstanding looming conflict with Russia. Iran negotiations could prove bearish for crude if they succeed, but also if they fail, because it’s not at all clear that Asian buyers would agree to pare back purchases in the event Congress passes new sanctions. U.S. crude production slowed by winter could catch back up in the spring thaw. The scale of ongoing crude disruptions (~3 MMbbl/d) may put Brent in a precarious position, too, for example should Iraq maintain production momentum or should Libya come back onstream.

BI: What will the lingering impact be of the unusually intense winter?

KB: Natural gas inventories ended the winter at ten-year lows. Mild weather could give inventories room to recover, but a hot summer could draw gas down still further, setting up higher prices for next winter. Price premiums during the past winter are likely to encourage greater investment in storage infrastructure, pipelines and – in the case of propane – inventories, an eventual buffer against future volatility.

BI: What kinds of investment allocations are now called for as China slows down?

KB: China’s growth may be slowing, but the base is getting bigger, too, and supply stability remains imperative. We expect Chinese oil and gas companies to continue their efforts to diversify supply, not only through foreign direct investment in North America and other producing areas, but also through intensifying efforts at domestic shale production. This keeps focus at the upstream. Likewise, China may offer a countervailing force against weaker crude prices by seizing upon discounts to expand strategic crude reserves between now and 2015.